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Currencies are stable (and losing 2% value per year) because governments actively manage the supply of money to keep it stable in the face of very volatile demand (caused by what Keynes called "animal spirits". Since demand will fluctuate Bitcoin will fluctuate wildly for the foreseeable future like the value of gold has done and is doing. Bitcoin will never be a stable, safe place to store wealth for that reason. It might be useful as a payment system where you quicly buy Bitcoin and give it to somebody for a product (who then quickly sells it again), but it will be to volatile for much else except speculation..

The government could keep currency stable by simply not permitting more to be created. Done. That's not the intention. The intention is to make sure the banks can loan out as much as they want when they want and then get bailed out when crashes occur.

Not true. If the amount of money in circulation was fixed, the fluctuating demand for it would cause its value (i.e. what goods/services it will purchase) will fluctuate with it.

It does that anyway. The currency itself would be stable and there would be no guessing games about what was going on with monetary policy since there would be no policy to discuss.

> The government could keep currency stable by simply not permitting more to be created.

That would keep one measure of money supply stable. It wouldn't keep the value of the dollar stable, though.

  ...fluctuate wildly for the foreseeable future like the
  value of gold has done and is doing.

The value of gold as measured how? Do you mean the price of gold in USD? Isn't that more indicative of the price of USD, and/or the price of cash vs. commodities?

No, since gold has varied far more in value than any inflationary/deflationary measure of USD.

How are you measuring gold's value?

Inflation adjusted dollars.

Inflation isn't the only thing that affects the value of USD. UDS's perceived value fluctuates with regard to investors' value perceptions of other currencies, commodities, etc.

Edit: If you think that USD has a fixed value, you are mistaken. You may use it as your reference point, but that just makes you blind to the fact that the perceived values of all currencies and assets are fluctuating all the time. There are some which are more closely tied together, and some which are less.

I still stand by the statment that gold is more volatile than the USD.

[edit] I have not done the analysis, but would wager that gold measured against a basket of goods or currencies is more volatile than USD similarly measured.

Author here. First, regarding point 2, I use a period of time in which 90% deflation occurred (from the perspective of bitcoin-holders) and consider what affect that would have on profits in a bitcoin-only economy. I do not assume 90% annual deflation forever, though I do suggest that deflation will continue. If anything I wrote seems to suggest deflation will continue at a rate 90% forever, please point out where and I will correct it.

The article uses 90% as the sample figure. There is no direct statement that this is the type of deflation that will occur, but it seems unlikely that bitcoin prices will increase 10x every year, which is what it would take to have that level of deflation in the long run.

Using a lower number, like 5%, would have been more reasonable, IMO.

I the the second paragraph, I link to a chart showing the percentage increase of the price of bitcoin in USD between July 25 and November 25, 2013. That increase would correspond to roughly a 90% decrease in bitcoin price levels. People holding bitcoin would perceive this as 90% deflation, while people not holding bitcoin would perceive this as a relative appreciation of bitcoin to the dollar.

It is a completely reasonable number because it actually happened, and I point all of this out in the blog post.

The thing is the use of such a high figure means that it is actually the lack of stability that is at issue and not the deflation. Imagine we had a currency that was inflationary at a rate of 90%. Then there would be absolutely no reason for anyone to accept payment in such a currency. I t would be impossible to order materials to create widgets. Widgets would also not get made unless we had a more stable currency (or system of exchange) alongside our inflationary one.

It is easy to argue that it would be the rate of movement and not the direction that causes problems in transactions.

1) Conversely, why would I want to keep my wealth denominated in a currency that loses 2% value every year?

Because you have no choice. Currencies are imposed by a ruling power (in our case the government) by force. When you choose your currency is usually in form of asset. But you can not pay your taxes in gold. Consequently you can not live in the USA without USD and in Europe without EUR.

2) Supposing 90% annual deflation forever, as this article does, is disingenuous. Bitcoin is currently a 5 year old technology, and of course it will have periods of significant volatility. In the long run, bitcoin will stabilize, and deflation will be on the rate of global economic growth, currently estimated at around 2%

That’s speculation, might be correct. No one knows.

3) In the long run, people could keep their wealth denominated in bitcoin, and spend dollars. There you have the best of both worlds: your wealth storage is deflationary, and your spending currency is inflationary.

As that’s exactly how it should be. Currencies are inflationary to induce consumer spending more today.

edit: 4) Perhaps most significantly, remember that bitcoins and dollars are exchangeable at any point in time. Any dollar you spend on goods/services is a dollar you could have spent on bitcoin. Have bitcoin enthusiasts completely stopped spending dollars on goods/services?

Did they ever do that? Bitcoin enthusiasts never used bitcoin for buying services. BTC buys you anonymity where is required that’s a revolutionary quality for a currency to have. But other than that, bitcoin has nothing to offer compared to fiat currency for daily transactions. Changing money from BTC to USD (and vice-versa) is not enough straight forward, as of today, to allow the majority of the population to use it. If I give you 10 BTC today, you need days to turn them to USD, while if I give you EUR, you needs hours probably maybe minutes.

> Consequently you can not live in the USA without USD and in Europe without EUR.

The 33 countries of Europe that are not in the euro zone would beg to differ.

http://en.wikipedia.org/wiki/Currencies_of_the_European_Unio... http://en.wikipedia.org/wiki/List_of_sovereign_states_and_de...

Because losing 2% to 3% every year is actually quite stable. Its so stable that the typical person doesn't notice it.

Deflation at the rate of 100% over two weeks on the other hand (ie: BTC's current rate of change), is absolutely and utterly ridiculous.

There's no such thing as free money. It's gotta come from somewhere, and it has to impose a cost somewhere.

Inflation in other currencies has a moderate, and mostly beneficial, cost. It encourages people to invest their money instead of just saving it, which leads to enhanced economic activity. Deflation in bitcoin only has value to the people "saving" their bitcoins, which sets up perverse incentives in regards to use of the currency as a medium of exchange.

> In the long run, bitcoin will stabilize,

Why would this be true? Gold and silver have been around a long time, but both are still relatively volatile.

I mean, I hope you're right, I'm just curious where you think volatility ends up and why you think so.

The volatility of Gold and Silver is approximately 20% / year. There was a MASSIVE Gold sell off earlier this year, which caused a temporary spike of Gold Volatility to 60%.

In comparison, the volatility of BTC is approximately 6000% / year.

The magnitude of volatility is straight up ridiculous. The behavior of BTC is more like a penny-stock than any commodity on the market

> Gold and silver have been around a long time, but both are still relatively volatile.

Are gold and silver not less volatile than government-issued currencies, the long-term value of which has traditionally ended at $0?

> Are gold and silver not less volatile than government-issued currencies

Which government issued currencies? Government issued currencies are not all alike.

> the long-term value of which has traditionally ended at $0?

Fiat currencies only end if the issuing entity ceases to exist or abandons them, and even so the market value of currency issued may not become zero, so the claim about ending value is suspect.

More importantly, though, volatility isn't even related to ending value, so this claim would be a complete non-sequitur even if it was true.

>> the long-term value of which has traditionally ended at $0

> More importantly, though, volatility isn't even related to ending value

Yeah, come heat death of the universe, ending value of all currencies will look pretty similar.

> Fiat currencies only end if the issuing entity ceases to exist or abandons them

I'm curious - can you point to one example of this happening?

To my knowledge they've all gone to zero in a hyperinflation but I'd love to know of a counterexample.

> > Fiat currencies only end if the issuing entity ceases to exist or abandons them

> I'm curious - can you point to one example of this happening?

Obvious, clear, and fairly recent examples include all of the European currencies that were retired in favor of the Euro.

> To my knowledge they've all gone to zero in a hyperinflation but I'd love to know of a counterexample.

A number have been abandoned (and often replaced by a new currency with the same name) by the issuing state in the face of inflation (often not even at the level typically labelled "hyperinflation"), but the nature of the "fiat" in "fiat currency" essentially assures some minimal residual value as log as the issuing state remains functional as a state and does not abandon the currency.

E.g., the pre-1993 Mexican Peso was withdrawn and replaced by the New Peso after a long period of double-digit annual inflation, but it neither "went to zero" (prior to being withdrawn) nor suffered hyperinflation (monthly inflation >50%.)

Bitcoin volatility is the result of thin order books. Look at http://bitcoinity.org/markets/bitstamp/USD: you can move the market by 10%+ with "just" a few million dollars. You can't move the market for Euros or Yen with that much money.

In a bitcoin success scenario, this will change once bitcoin is no longer the sole domain of currency speculators, but starts seeing actual commerce. Some places where this could start:

1) International remittance. Wire transfers are slow and expensive. Bitcoin could make moving money internationall much easier. See, for example, YC-backed "Buttercoin": http://techcrunch.com/2013/08/20/buttercoin/

2) Merchant adoption. Credit card fees for online commerce are in the 2-3% + $.35 range. Bitpay currently offers 0% fees, instead charging a flat $30/month: https://bitpay.com/pricing

3) Micropayments: The "+ $.35" part of credit card fees precludes micropayments. Bitcoin could be used for things like pay-per-minute streaming.

Once these types of things start adding volume and depth to the exchanges, it will be harder to move the market, and that will add stability. Obviously, this will take a few years.

Volatile by what measurement? Hopefully you don't mean volatile with regard to the exchange rate with fiat currencies. Because that says more about the currencies than it does about gold and silver.

Why would deflation converge to the rate of global economic growth? I'd think that the opposite tends to be true, eg. the inflation is often correlated with growth.

Suppose the only good in the world is apples, and the only currency is bitcoins. There are 21 million bitcoins in existence.

In 2013, we produce 21 million apples, so we could say that each bitcoin is worth 1 apple. In 2014, we produce 42 million apples, which is 100% annual GDP growth. Each bitcoin is worth 2 apples, which is a 100% appreciation in the value of the currency, aka. deflation.

Just to explain why growth => inflation, frequently:

Grow the (effective) money supply with lending and deposit accounts, and apples / dollar falls. When things are growing, people know there is money to be made, and so expect they are more likely to be paid back, and so lend more freely.

Thanks. That was counter-intuitive for me, now I get it.